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A bilateral investment treaty between India and the U.S. looks difficult in the present circumstances unless either of the two sides blinks

When Prime Minister NarendraModi visits the U.S. this month, one of his high-agenda items will be the bilateral investment treaty (BIT) between the two countries. BITs impose obligations under international law on host states to protect foreign investment from the other state. Preparations for this are already reportedly underway, with senior U.S. officials having met the Finance Ministry officials. India and the U.S. started negotiating a BIT in 2009. However, these negotiations lost steam because both countries were busy updating their model BITs. The U.S. adopted one in 2012 replacing the 2004 model. India adopted a new model BIT in 2015 as a reaction to foreign corporations suing the country under different BITs, and perhaps with the objective to immunise itself from claims of foreign corporations under international law. Paradoxically, the Indian model BIT came at a time when Prime Minister Modi was and is busy convincing the U.S. and other foreign corporations to ‘Make in India’.

Negotiating a BIT

The moribund BIT negotiations between the two sides got a fresh lease of life during President Barack Obama’s visit to India last year. The India-U.S. joint declaration of January 25, 2015 recognised the significance of moving forward on high-standard BIT negotiations, which would help in creating a predictable investment climate and boost bilateral investment flows. Mr. Modi, during his U.S. visit in September 2015, again emphasised that working towards negotiating a BIT is integral to the two sides developing stronger bilateral economic cooperation.

A balanced BIT that protects foreign investment without unduly compromising the host state’s right to regulate will benefit both India and the U.S. It will send a positive signal to U.S. investors who are concerned about legal certainty in India. It will also protect Indian investment in the U.S. According to a 2015 report prepared by the Confederation of Indian Industry (CII) and Grant Thornton, 100 Indian companies such as Tata, Wipro, Cipla, Tech Mahindra and Infosys have invested more than $15.3 billion in the U.S.

However, there is a yawning gap between the two sides on core foreign investment protection standards, as reflected in their respective model BITs, which makes BIT negotiations really difficult. Let us look at some of these differences.

First, the U.S. model BIT contains a Most Favoured Nation (MFN) provision — a cornerstone of non-discrimination in international economic relations — which is missing in the Indian model. It will be very difficult for India to convince the U.S. to have a BIT without a MFN provision. From the U.S.’s perspective, this would mean that American businesses would have no remedy under international law, if the latter were discriminated against in India. The same argument would apply for Indian investment in the U.S.

Second, the Indian model completely excludes taxation from the purview of the BIT — a direct response to Vodafone and Cairn Energy bringing BIT claims against India for imposing taxes retrospectively. However, in the U.S. model, foreign investors can assert claims that taxation measures, such as confiscatory taxation, involve an expropriation of foreign investment. Given India’s recent record in administering its taxation laws that has made foreign investors jittery, it will be quite difficult for it to convince the U.S. to agree to completely exclude taxation from the BIT.

Third, the Indian model completely excludes issuance of compulsory licenses (CLs) and revocation of intellectual property rights (IPR) from its purview. On the other hand, the U.S. model BIT excludes issuance of CLs and revocation of IPR only from the purview of the expropriation provision. In other words, while the foreign companies, including pharmaceutical companies, cannot challenge issuance of CLs and revocation of IPR as expropriation, they can surely challenge it as violation of other BIT provisions such as fair and equitable treatment (FET) — a pretty stretchable investment protection provision that has often been abused by foreign corporations. Complete exclusion of issuance of CLs and revocation of IPR from the purview of the BIT might not be acceptable to the U.S. for two reasons: first, it would not allow U.S. companies to sue India directly for issuance of CLs or revocation of IPR; second, the U.S. continues to place India, along with China and Russia, on a ‘priority watch list’ for IPR violations, and thus would not like to foreclose opportunities for challenging India’s IP laws internationally. India’s recently unveiled IPR policy has cut no ice with the U.S.

Fourth, the major difference between the two models is on the issue of investor state dispute settlement (ISDS) provisions. ISDS provision in BITs allows foreign investors to directly bring claims against the host state under international law, without the approval of the investor’s home state. The Indian model BIT, unlike the U.S. model, mandatorily requires foreign investors to litigate in domestic courts for five years before pursuing a claim under international law. This is not at all an attractive proposition for U.S. companies in India because of the overstretched Indian judicial system where more than three crore cases are pending. One is unsure to what extent the Commercial Courts Act, 2015, aimed at speedy resolution of commercial disputes, will be able to restore investor confidence in the Indian judicial system.

Global economic situation

The issue of BIT negotiations cannot be quarantined from the larger economic issues between the two countries, especially the trade battle at the World Trade Organisation. The U.S. continues to accuse India for stalling the trade talks at WTO, which India vehemently counters. Also, India and the U.S. have been involved in a spate of trade disputes at the WTO. In 2015, India lost the case on ban of poultry imports to the U.S. at the WTO. Currently, India and the U.S. are holding consultations at the WTO to resolve India’s complaint over increased visa fees by the U.S. This comes immediately after India lost the solar panel case to the U.S. in the WTO. This, in turn, perhaps prompted the government to inform Parliament that India plans to file as many as 16 disputes against the U.S. in the WTO challenging the U.S.’s renewable energy programmes.

All these developments might have soured the environment for healthy bilateral economic engagement, which could impact BIT negotiations. Consequently, notwithstanding the top leadership expressing commitment, a BIT looks difficult in the present circumstances unless one of the sides blinks. Will India blink first?

Prabhash Ranjan is an Assistant Professor of Law at the South Asian University, New Delhi. The views expressed here are personal.